Value-added Tax

Secs. 105 to 115

Value-added Tax
Characteristics: Indirect Tax; Tax on consumption; Regressive Tax; Philippines uses Tax Credit Method Destination Principle - goods and services are taxed only in the country where these are consumed. Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposed with 12% VAT.

Value-added Tax
Persons Liable: 1. Seller of goods; 2. Lessor of services / lessor of goods or properties; 3. Importer of goods.

Ordinary Course of Trade or business - means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.

Value-added Tax
Rule on regularity does not apply to: 1. Importations; and, 2. Sale of services by non-residents in the Phils. Special Rules on: Husband and Wife are separate taxpayers but subject to the aggregation rule; Unincorporated Joint Venture while exempt from income tax is subject to VAT; GPPs may be subject to VAT but the partners who exercise their profession thru the GPP are no longer subject to VAT;

Value-added Tax
Association and membership dues collected by Condominium Corporations and Homeowners Association now subject to VAT (RMCs 65-2012 and 9-2013) except if RA 9904 (Magna Carta for Homeowners and Homeowners Association) applies.

Value-added Tax
If a Company renders services in the Philippines on a reimbursement of cost basis, is the transaction subject to VAT? Yes, as long as the Company renders services in the Philippines, whether it incurs profit or not it is subject to VAT. The Tax Code clarifies that even a non-stock, non-profit organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented.

Value-added Tax
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. (CIR vs. CA and COMASERCO, GR No. 125355 dated March 30, 2000)

Value-added Tax
Are subsidized expenses paid for by a subsidiary and subsequently reimbursed by its parent company subject to VAT?

No. The CIR further argues that Sony (the subsidiary) itself admitted that the reimbursement from SIS (parent company) was income and, thus, taxable. In support of this, the CIR cited a portion of Sony's protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent to the latter's advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the most, this is an additional income of our client subject to income tax. We submit further that our client is not subject to VAT on the subsidy income as this was not derived from the sale of goods or services. Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the Court agrees. However, the Court does not agree that the same subsidy should be subject to the 12% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony's advertising expense for it was but an assistance or aid in view of Sony's dire or adverse economic conditions, and was only "equivalent to the latter's (Sony's) advertising expenses. Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

Value-added Tax
SEC. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to ten percent (10%) [now 12%] of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony. In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, however, is not applicable to the present case. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without profit. This is not true in the present case. Sony did not render any service to SIS at all. The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter's advertising expense but never received any goods, properties or service from Sony. (CIR vs. Sony Philippines, Inc., GR No. 178697 dated November 17, 2010)

Value-added Tax
Mandatory VAT Registration: a) Gross sales or receipts for the past twelve (12) months, other than those that are exempt under Sec. 109 (1)(A) to (V) of the Tax Code, have exceeded PhP1,919,500.00; or b) There are reasonable grounds to believe that taxpayers gross sales or receipts for the next 12 months, other than those that are exempt under Sec. 109 (1)(A) to (V) of the Tax Code, will exceed PhP1,919,500.00; or c) Franchise grantees of radio and television broadcasting, whose gross annual receipts for the preceding calendar year exceeded PhP10,000,000.00.

Value-added Tax
Formula: Gross Sales or Receipts: Less: Gross Sales or Receipts (109 A to V): Total Total compare with PhP1,919,500 threshold xxx xxx xxx

Value-added Tax
Optional VAT Registration: a) Any person who is VAT-exempt under Sec. 109(w) not required to register for VAT may, in relation to Sec. 109(2), elect to be VAT-registered. b) Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Section 109(1) of the Tax Code, as amended. [Sec. 109(2)]
c) Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed PhP10,000,000.00 derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable. (Sec. 119, Tax Code) Any person who elects to register under (a) and (b) above shall not be allowed to cancel his registration for the next three (3) years.

Sale of goods: 1. Requisites:

a)

Value-added Tax

There is an actual or deemed sale, barter or exchange of goods or properties for a valuable consideration; b) The sale is undertaken in the course of trade or business or exercise of profession in the Philippines; c) The goods or properties are located within the Philippines and are for use or consumption therein; and, d) The sale is not exempt from VAT under Sec. 109 of the Tax Code, special law, or international agreement binding upon the government of the Philippines.

2. Tax base Generally, gross selling price. 3. Real property - primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller. Exp. if the real property is used in business. (incidental transaction)

Value-added Tax
Sale of Real Property Exempt from VAT:
a) Sale of idle real property (one which is not used in business);
b) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other related laws, such as RA No. 7835 and RA No. 8763; c) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is PhP225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. d) Sale of residential lot valued at PhP1,919,500.00 and below, or house & lot and other residential dwellings valued at PhP3,199,200.00 and below; If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,919,500.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot.

Value-added Tax

Transactions deemed sale:

a) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business. Transfer of goods or properties not in the course of business can take place when VAT-registered person withdraws goods from his business for his personal use; b) Distribution or transfer to: (i) Shareholders or investors share in the profits of VAT-registered person; (ii) Creditors in payment of debt or obligation. c) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods returned by the consignee within the 60day period are not deemed sold;

Value-added Tax
d) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to transactions "deemed sale":
i. Change of ownership of the business. There is a change in the ownership of the business when a single proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business. ii. Dissolution of a partnership and creation of a new partnership which takes over the business.

Value-added Tax
Change or Cessation of Status as VAT-Registered Person: The VAT provided for in Sec. 106 of the Tax Code shall apply to goods or properties originally intended for sale or use in business, and capital goods which are existing as of the occurrence of the following: (1) Change of business activity from VAT taxable status to VAT-exempt status. (2) Approval of a request for cancellation of registration due to reversion to exempt status. (3) Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of three (3) consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2) of the Tax Code. (4) Approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipts exceeding P1,919,500.00, but who failed to exceed this amount during the first twelve months of operation.

Value-added Tax
Change or Cessation of Status as VAT-Registered Person: (Not subject to VAT):

The VAT shall not apply to goods or properties which are originally intended for sale or for use in the course of business existing as of the occurrence of the following:
(1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder (individual or corporate) or group of stockholders. The goods or properties used in business (including those held for lease) or those comprising the stock-intrade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest in the said corporation. However, the exchange of goods or properties including the real estate properties used in business or held for sale or for lease of by the transferor, for shares of stocks whether resulting in corporate control or not, is subject to VAT.

Value-added Tax
Change or Cessation of Status as VAT-Registered Person: (Not subject to VAT):

Illustration: Abel Corporation (transferee) is a merchandising concern and has an inventory of goods for sale amounting to Php1 million. Nel Corporation (transferor), a real estate developer, exchanged its real estate properties for the shares of stocks of Abel Corporation resulting to the acquisition of corporate control. The inventory of goods owned by Abel Corporation (Php1 million worth) is not subject to output tax despite the change in corporate control because the same corporation still owns them. This is in recognition of the separate and distinct personality of the corporation from its stockholders. However, the exchange of real estate properties held for sale or for lease by Nel Corporation, for shares of stocks of Abel Corporation, whether resulting to corporate control or not, is subject to VAT. This is an actual exchange of properties which makes the transaction taxable.
(2) Change in the trade or corporate name of the business; (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation.

Value-added Tax
VAT on importation: 1. Importer is the one liable to pay the VAT; 2. VAT on importation is a NIRC tax but is collected by the Bureau of Customs (Sec. 12 of the NIRC); 3. In the case of goods imported into the Philippines by VAT-exempt persons, entities or agencies which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the latter shall be considered the importers thereof and shall be liable for VAT due on such importation. The tax due on such importation shall constitute a lien on the goods, superior to all charges/or liens, irrespective of the possessor of said goods. Also, if this particular scenario results in a deficiency VAT, a Preliminary Assessment Notice is not required under Sec. 228 of the Tax Code.

Sale of services: 1. Requisites:

a)

Value-added Tax

There is a sale or exchange of service or lease of property enumerated in the law or other similar services; b) The service is performed or to be performed in the Philippines; c) The service is performed or to be performed in the course of the taxpayers trade or business or profession; d) The service is performed or to be performed for a valuable consideration actually or constructively received; and, e) The service is not exempt under the Tax Code, special law, or international agreement.

2. The service must be performed in the Philippines. If the service is performed outside the Philippines, the sale of service is not subject to VAT.

Sale of services: 3. Tax base - "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT. 4. Professionals - These includes lawyers, doctors, those who passed the applicable licensure exams conducted by the PRC, actors/actresses, talents, singers, emcees, radio/television broadcasters, choreographers, musical/radio/movie/television/stage directors, and professional athletes. 5. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries are subject to percentage tax under Secs. 121 and 122 of the Tax Code, such as money changers and pawnshops.

Value-added Tax

Sale of services:

Value-added Tax

6. Cinema Tickets? Subject to VAT. while the

enumeration of services under Sec. 108 is merely by way of example only and not exclusive, the legislative intent is not to impose VAT on gross receipts of cinema/theater houses on their admission tickets. Instead, the same is subject to the 10% amusement tax under the Local Government Code, as amended. Only lessors or distributors of cinematographic films are included in the coverage of VAT. (CIR vs. SM Prime Holdings, GR No. 183505 dated February 26, 2010)

Value-added Tax
Are Toll Fees? Subject to VAT?
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the sellers liability but merely the burden of the VAT.

Value-added Tax
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105 of the Code, VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees. For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a "users tax." VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways. (Diaz vs. the SOF and the CIR, GR No. 193007 dated July 19, 2011)

Value-added Tax
Kinds of Franchise Grantees: 1. Radio and /or television broadcasting PhP10M threshold VAT/3% percentage tax; 2. Gas and Water utilities 2% percentage tax; 3. Others PhP1,919,500 threshold/ 3% percentage tax;

Value-added Tax
Rule on lease of residential units:
1. As a general rule, lease of real property is subject to VAT. However, Lease of residential units with a monthly rental per unit not exceeding PhP12,800.00, regardless of the amount of aggregate rentals received by the lessor during the year are exempt from VAT. 2.Residential unit - The term residential units shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels, hotel rooms, lodging houses, inns and pension houses. The term unit shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.

Value-added Tax
3. Lease of residential units where the monthly rental per unit exceeds PhP12,800.00 but the aggregate of such rentals of the lessor during the year do not exceed PhP1,919,500.00 shall likewise be exempt from VAT, however, the same shall be subjected to 3% percentage tax. 4. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P12,800.00 while others are leased out for more than P12,800.00 per unit, his tax liability will be as follows: a) The gross receipts from rentals not exceeding P12,800.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. b) The gross receipts from rentals exceeding P12,800.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P12,800.00) exceeds P1,919,500.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code.

Value-added Tax
Rule on Common Carriers:

a) Common carriers by land with respect to their gross receipts from the transport of passengers including operators of taxicabs, utility cars for rent or hire driven by the lessees (rent-a-car companies), and tourist buses used for the transport of passengers shall be subject to the percentage tax imposed under Sec. 117 of the Tax Code, but shall not be liable for VAT; b) Common carriers by land with respect to their gross receipts from the transport of goods are subject to VAT; c) Domestic common carriers by air and sea are subject to 12% VAT on their gross receipts from their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines;

Value-added Tax
Rule on Common Carriers:

d) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country are subject to 0% VAT; e) Gross receipts derived from transport of cargo from the Philippines to another country by international air carriers doing business in the Philippines and international shipping carriers doing business in the Philippines are liable to the 3% percentage tax under Sec. 118 of the Tax Code (amended by RA 10378) f) Transport of passengers by international carriers shall be exempt from VAT [109(S) of the Tax Code as amended by RA 10378]

Value-added Tax
Rules on some important services: 1. Sale of electricity by generation, transmission, and distribution companies shall be subject to 12% VAT on their gross receipts; Provided, That sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels shall be subject to 0% VAT; 2. Dealers in securities and lending investors shall be subject to VAT on the basis of their gross receipts. However, for Dealer in Securities, the term "gross receipts" means gross selling price less cost of the securities sold. 3. PAGCOR is exempt from VAT by virtue of its charter, PD 1869 in relation to Sec. 109 (k);

Value-added Tax
4. Services rendered by Health Maintenance Organizations (HMOs). HMOs are entities, organized in accordance with the provisions of the Corporation Code of the Philippines and licensed by the appropriate government agency, which arranges for coverage or designated managed care services needed by plan holders/members for fixed prepaid membership fees and for a specified period of time. 5. Directors fees are not subject to VAT. Fees and allowances being given to a director of a corporation are not derived from an economic or commercial activity pursued in the course of trade or business. Rather, these are paid in the exercise of the right of an owner in the management of a corporation. (RMC No. 77-2008 dated November 24, 2008)

Value-added Tax
"(a) Export Sales. - The term 'export sales' means: "(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,(BSP); "(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): "(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; "(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); "(5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and "(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations.

Value-added Tax
"(b) Foreign Currency Denominated Sale. - The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

"(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

Value-added Tax
"(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:

"(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;

Value-added Tax
"(4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; "(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production; "(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and "(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

Value-added Tax
Zero-rated Transaction 1. a taxable transaction but does not result in an output tax; 2. The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded; 3. VAT registration is mandatory. Exempt Transaction 1. an exempted transaction is not subject to the output tax; 2. the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt; 3. VAT registration is optional.

Value-added Tax
Effetively Zero-Rated
1. Refer to the sale of goods or supply of services to persons (made by a VAT-registered person) or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate.; 2. intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

Automatic Zero-rating 1. generally refer to the export sale of goods and supply of services.; 2. primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales.

Value-added Tax
Exempt Party
A person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.

Exempt Transaction
Involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VAT-exempt or not of the party to the transaction. Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

Value-added Tax
a) Importation of personal and household effects belonging to residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines; Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery and other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bonafide; Services subject to percentage tax under Title V of the Tax Code; Medical, dental, hospital and veterinary services, except those rendered by professionals.

b)

c) d)

Value-added Tax
f) Educational services rendered by private educational institutions duly accredited by the Department of Education (DepED), the Commission on Higher Education (CHED) and the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions; "Educational services" shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepED, the CHED and TESDA and those rendered by government educational institutions and it does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA; Services rendered by individuals pursuant to an employeremployee relationship; Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the Philippines;

g) h)

Value-added Tax
i) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws except those granted under PD No. 529 Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and j) Export sales by persons who are not VAT-registered; k) Sale, importation, printing or publication of books and any newspaper, magazine, review, or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; l) Transport of passengers by international carriers (109S); m) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million nine hundred nineteen thousand five hundred (P1,919,500.00);

Value-added Tax
Transactions previously exempt but are now taxable under RA 9337:
Sale of non-food agricultural (e.g., flowers), marine (e.g., corals) and forest products (e.g., lumber, cotton and cotton seeds) is now subject to VAT; and, Sale of works of arts, literary works and musicals.

a VAT-registered person may elect that the exemption in Sec. 109 (1) of the Tax Code shall not apply to his sales of goods or properties or services. Once the election is made, it shall be irrevocable for a period of three (3) years counted from the quarter when the election was made.

Value-added Tax
Expanded Senior Citizens Act of 2010 RA 9994: Sale of any goods and services to a Senior Citizen to which entitles the Senior Citizen to a discount is likewise exempt from VAT, except: Electricity and water consumption of Senior Citizens.

Value-added Tax
Output tax - VAT on the sale of goods or services; Input tax - VAT on the purchase of goods or services:

Formula:
Output Tax: Input Tax: VAT payable: xxx (xxx) xxx

Value-added Tax
For the 1st Quarter of 2013, X purchased PhP10,000 (VAT exclusive) worth of goods and subsequently sold the same for PhP30,000 (VAT exclusive). 1st Quarter VAT return: Output Tax: (PhP30k x 12%) PhP3,600 Input Tax: 1,200 VAT payable: PhP2,400

Value-added Tax
A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions subject to valueadded tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity.

Value-added Tax
Sources of input tax: a) Purchase or importation of goods;
Special rule on capital goods

b) Purchase of real properties for which a VAT has actually been paid; c) Purchase of services in which a VAT has been paid; d) Transactions deemed sale; e) Transitional input tax; f) Presumptive input tax.

Value-added Tax
Transitional Input Tax: Taxpayers who became VAT-registered persons upon exceeding the minimum turnover of P1,919,500.00 in any 12-month period, or who voluntarily register even if their turnover does not exceed P1,919,500.00 (except franchise grantees of radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on the following: a) b) c) d) e) goods purchased for resale in their present condition; materials purchased for further processing, but which have not yet undergone processing; goods which have been manufactured by the taxpayer; goods in process for sale; or goods and supplies for use in the course of the taxpayer's trade or business as a VAT-registered person.

Value-added Tax
The transitional input tax shall be two percent (2%) of the value of the beginning inventory on hand or actual VAT paid on such, goods, materials and supplies, whichever is higher, which amount shall be creditable against the output tax of VAT-registered person. The value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% transitional input tax, excluding goods that are exempt from VAT under Sec. 109 of the Tax Code.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer's income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments. (Fort Bonifacio Development vs. CIR, GR No. 158885 dated April 2, 2009)

Value-added Tax
Presumptive Input Tax: Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

Substantiation Requirement: a) For the domestic purchase of goods and properties invoice showing the information required under Secs. 113 and 237 of the Tax Code. b) For the purchase of real property public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller. c) For the purchase of services official receipt showing the information required under Secs. 113 and 237 of the Tax Code. A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Secs. 113 and 237 of the Tax Code.

Value-added Tax

Value-added Tax
(1)

A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided, That: (a) The amount of the tax shall be shown as a separate item in the invoice or receipt; (b) If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt; (c) If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; (d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt: "Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. (3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and (4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client.

Value-added Tax
May the VAT on subsidized expenses paid for by a subsidiary and subsequently reimbursed by its parent company be claimed as input VAT credits? The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising expense should be for the account of SIS, and not Sony. The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that should have been realized from the advertising expense of the latter. It is evident under Section 110 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. xxx. There is also no denying that Sony incurred advertising expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the latter paid for the same. Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from is another matter all together but will definitely not change said fact.

Value-added Tax
Claim for refund of excess input VAT credits: a) If the VAT registered taxpayer has excess input tax attributable to zero-rated sales which have not been applied to any output tax; b) If the VAT registered taxpayer has unused input tax and it desires to cancel its VAT registration.

Value-added Tax
Requisites: 1. There must be zero-rated or effectively zero-rated sales; 2. That input taxes were incurred or paid; 3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales; 4. That the input VAT payments were not applied against any output VAT liability; and 5. That the claim for refund was filed within the two-year prescriptive period. We have ruled in several cases that the printing of the word zerorated is required to be placed on VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or refund. In Panasonic v. Commissioner of Internal Revenue, we held that the appearance of the word zero-rated on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT is actually paid. Absent such word, the government may be refunding taxes it did not collect.

Value-added Tax
Administrative Claim for refund

Judicial Claim for refund

After the taxpayer has filed its administrative claim for refund with the BIR above, the taxpayer has the duty to submit all supporting documents. Within 120 days from the complete submission of documents, the CIR shall decide on the refund. The taxpayer must appeal to the CTA: (1) In case the CIR acted on the claim for refund, within 30 days from the denial of the claim for refund; or, (2) In case of inaction, within 30 days from the lapse of the 120 day period. [Sec. 112(C)]

a) Zero-rated - within 2 years after the close of the taxable quarter when the zero-rated sales are made. b) Cancellation of VATregistration - 2 years from the date of cancellation.

Value-added Tax
The above proviso clearly provides in no uncertain terms that unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not. (CIR vs. Mirant Pagbilao)

Value-added Tax
For the 1st Quarter of 2013, X a VAT-registered person purchased PhP10,000 (VAT exclusive) worth of goods from Z, also a VAT-registered person and subsequently sold the same for PhP30,000 to the Asian Development Bank (VAT exclusive). 1st Quarter VAT return: Output Tax: (PhP30k x 0%) Input Tax: VAT payable:

PhP 1,200 PhP(1,200)

Value-added Tax
Assume that the filing of the administrative claim for refund and the judicial claim for refund was filed on the same day (but within the 2 year period under Sec. 112), was the judicial claim for refund premature and thus, should be dismissed? or stated differently, should the BIR be given the full 120 days to decide before a judicial claim for refund under Sec. 112 be filed with the CTA? Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission of the complete documents in support of the application [for tax refund/credit]," within which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days. In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this reason, we find the filing of the judicial claim with the CTA premature.

Value-added Tax
Respondent's assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial claim as long as both the administrative and the judicial claims are filed within the two-year prescriptive period has no legal basis. There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A) of the said provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales." The phrase "within two (2) years . . . apply for the issuance of a tax credit certificate or refund" refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR has "120 days from the submission of complete documents in support of the application filed in accordance with Subsections (A) and (B)" within which to decide on the claim. In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA. (CIR vs. Aichi Forging Asia, GR No. 184823 dated October 6, 2010)

Value-added Tax
Summary of rules: 1. An administrative claim must be filed with the CIR within 2 years after the close of the taxable quarter when the zero-rated or effectively zero-rated sale were made. 2. The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the 2-year period from the filing of the administrative claim if the claim is filed in the later part of the 2-year period. If the 120-day period expires without any decision from the CIR, then administrative claim may be considered to be denied by inaction.

Value-added Tax
3. A judicial claim must be filed with the CTA within 30 days from the receipt of the CIRs decision denying the administrative claim or from the expiration of he 120-day period without action from the CIR.

Value-added Tax
Refund shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on Audit (COA), the provision of the Revised Administrative Code to the contrary notwithstanding; Provided, that refunds under this paragraph shall be subject to post audit by the COA.

Value-added Tax
Issuance of a VAT Invoice or VAT Receipt by a non-VAT person. If a person who is not VAT-registered issues an invoice or receipt showing his TIN, followed by the word "VAT", the erroneous issuance shall result to the following: The non-VAT person shall be liable to:
1. 2. 3. the percentage taxes applicable to his transactions; VAT due on the transactions under Sec. 106 or 108 of the Tax Code, without the benefit of any input tax credit; and, a 50% surcharge under Sec. 248 (B) of the Tax Code.

VAT shall be recognized as an input tax credit to the purchaser under Sec. 110 of the Tax Code, provided the requisite information required under the law or regulations of the BIR is shown on the invoice or receipt.

Value-added Tax
Erroneous Issuance of a VAT Invoice or VAT Receipt by a VAT-registered person. If a VATregistered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words "VAT-exempt sale", the transaction shall become taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase.

Value-added Tax
Deadline for tax VAT returns: a) Monthly - 20th day following the end of each month; b) Quarterly - twenty five (25) days following the close of taxable quarter.

Value-added Tax
Withholding VAT:

The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services taxed at twelve percent (12%) VAT pursuant to Secs. 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceeds seven percent (7%) of gross payments, the excess may form part of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost.

Value-added Tax
Withholding VAT:

The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services taxed at twelve percent (12%) VAT pursuant to Secs. 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceeds seven percent (7%) of gross payments, the excess may form part of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost.

Value-added Tax
Suspension or Closure of business: In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the Commissioner of Internal Revenue or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations: a) Failure to issue receipts and invoices. b) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code. c) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter. d) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code.